ECO 100 - 7 - F2026
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Overview
Matthew Baker explains how price ceilings, price floors, and per-unit taxes change market outcomes by redistributing consumer and producer surplus, creating shortages or surpluses, and often preventing beneficial trades. Using rent control, a $15 minimum wage, and gasoline and wine taxes, he emphasizes counterfactual analysis, rationing, deadweight loss, tax incidence, and the gap between simple supply-and-demand predictions and empirical evidence.
Key takeaways
- In the rent-control example, a $2,000 ceiling reduces rent below the $3,000 equilibrium, creating a shortage of 400 apartments and reducing total surplus from 1,800 to 1,600.
- A binding $15 minimum wage in the labor-market example creates 1,500 unemployed workers because 3,000 people want jobs while businesses demand 1,500; the modeled deadweight loss is 1,875.
- Price controls require rationing: queues, kickbacks, and other efforts to secure scarce apartments or jobs can dissipate resources beyond the best-case deadweight-loss calculation.
- A $1 wine tax is split between buyers and sellers in the example: consumers pay $10.60, producers keep $9.60, and the government receives the $1 wedge.
- A per-unit tax can be represented as a downward shift in demand when paid by consumers or an upward shift in supply when paid by producers; both approaches yield the same modeled outcome.
- Empirical findings broadly align with textbook predictions for minimum-wage employment and rent-control housing outcomes, while monopsony power and unmodeled social goals can qualify policy conclusions.
Chapters
- Matthew Baker outlines the exam schedule: practice materials arrive Wednesday, a full review is planned for October 5, and the exam is the following Wednesday.
- Exam calculators may include basic arithmetic, square roots, and exponentials, but phones and image-solving calculators are prohibited.
- Eight chapters and eight homework assignments are available on Top Hat; students can also use TA Hem's office hours, the tutoring center at 1537 Hunter West, and Baker's office hours.
- The supply curve traces producers' marginal costs, while the demand curve traces consumers' marginal benefits or willingness to pay.
- Producer surplus is the area below the market price and above supply; consumer surplus is below demand and above price.
- Adding the two surpluses measures the gains from exchange in a market.
- A price ceiling holds price below equilibrium, while a price floor holds it above equilibrium.
- Baker frames rent control as a ceiling, agricultural price supports as floors, and sales or property taxes as additional interventions.
- These policies redistribute gains from exchange and can create deadweight loss by preventing beneficial trades.
- Baker first compares the policy with a baseline market: rent is $3,000 and 600 units are rented at equilibrium.
- The baseline consumer and producer surplus triangles each have an area of 900, for total surplus of 1,800 in the diagram's units.
- A clear counterfactual, the market outcome without rent control, is necessary to judge the policy's effects.
- At a legally imposed $2,000 monthly rent, the diagram shows 800 units demanded but only 400 supplied, leaving a shortage of 400 units.
- In the best-case allocation, the first 400 consumers on the demand curve, those with the highest valuations, receive the apartments.
- The example's total surplus falls from 1,800 to 1,600, with a deadweight loss of 200 from trades that no longer occur.
- A shortage requires a way to allocate apartments, such as queues, landlord kickbacks, or physical competition.
- Waiting time and other efforts to secure scarce housing dissipate resources rather than create additional housing value.
- Rent control can therefore produce costs beyond the diagram's best-case deadweight loss, depending on how the 400 available units are allocated.
- In Baker's labor-market model, wages are the price of labor, workers supply labor, and businesses demand it.
- The baseline example has a $10 wage and 2,000 workers employed; workers receive producer surplus and businesses receive consumer surplus.
- A minimum wage below the market wage, such as $5 in this example, does not bind and does not change the outcome.
- At a $15 wage floor, 3,000 people are willing to work, but businesses demand only 1,500 workers, leaving 1,500 people without jobs in the diagram.
- Assuming the first 1,500 workers on the supply curve get jobs, total surplus falls from 30,000 to 28,125.
- The resulting deadweight loss is 1,875, representing jobs and mutually beneficial employment trades that disappear.
- Rationing may happen through queues, employer preferences, seniority, or informal payments, rather than by worker willingness to accept a lower wage.
- A minimum wage can raise surplus for workers who keep their jobs while reducing firms' surplus and excluding workers who cannot find employment.
- Baker stresses that fairness claims require identifying the alternative outcome, not just comparing a policy with an ideal of guaranteed housing or wages.
- He describes research by Treb Allen and a colleague using a quantitative spatial model to estimate slavery's economic effects and the counterfactual after emancipation.
- The cited analysis estimates large welfare gains for formerly enslaved people, while identifying free workers and slaveholder profits among groups that could lose.
- A meta-study of minimum-wage research generally finds negative employment effects, especially for teenagers, young adults, and less-educated workers.
- Results in low-wage industries are less uniform; Baker notes that employer monopsony power, which the simple competitive model omits, can change predictions.
- A rent-control research review reports lower tenant mobility, reduced construction and housing quality, and fewer available units.
- Studies also find higher rents in uncontrolled housing and misallocation, such as a single renter occupying an apartment designed for a larger household.
- Baker suggests that political support can reflect concentrated interests, diffuse costs, and the relative number or political influence of renters and landlords.
- People seeking housing or jobs but unable to obtain them may be overlooked in debates focused on current tenants, workers, landlords, or firms.
- Policies may also pursue goals omitted from the basic supply-and-demand model, including wage dignity, stability, and neighborhood continuity.
- A per-unit tax can be legally imposed on either consumers or producers, but the market adjustment determines the actual burden.
- In Baker's wine example, a $1 tax raises the consumer price from $10 to $10.60 while producers receive $9.60 after remitting the tax.
- Consumers bear 60 cents of the tax and producers bear 40 cents, with the full $1 difference forming the tax wedge.
- The relevant comparison is the post-tax outcome against the market price that would have prevailed without the tax.
- For a $3-per-gallon tax paid by consumers, willingness to pay falls by $3, so the demand curve shifts vertically downward.
- In the gasoline example, consumers pay $6 per gallon and producers receive $3, with the $3 gap going to the government; the quantity shown is about 3.3 million gallons.
- If the tax is imposed on gas stations instead, it raises per-unit production costs and shifts the supply curve upward by $3.
- Whether the tax is modeled on buyers or sellers, the lecture's diagram produces the same market outcome and tax wedge.
Transcript excerpt
0:00 All right, it is now 10:02, our uh de facto start time. So, we'll get rolling here today with lecture 7, I believe it is. Uh hopefully we'll talk a little bit about taxes and tax incidents. Doesn't sound very exciting, I know, but trust me, it is kind of a much more interesting than you might think. Uh for the class today, really, these are our top hat uh uh re, you know, on top chapter seven and eight. More on that in a second. Actually, let me just dive right in here. Uh, our calendar that we've been kind of having uh following along uh our progress with is getting a little short, right? Today is Monday the 28th. We're doing our seventh lecture. Next lecture, I'm going to hand out and tell you all about all the practice
0:49 materials that you'll have for the exam. will pick up any pieces and do a little bit of you know lecture stuff on class material original stuff I guess Monday the 5th of October we will spend that entire class reviewing the practice materials which are designed to carefully simulate the stuff that you'll see on the exam right and so the idea here is to try to as much as possible to remove uncertainty about you know how long the exam will be what kinds of questions questions I will ask uh all of that stuff so you can focus on just knowing the stuff right and you don't have to worry about what the exam is like. So that will happen Monday and of course uh going over the actual we we'll have an actual practice exam which I
1:36 make in parallel with the with the exam. Uh I have some other review questions that come from Top Hat as well. That's
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Summary, takeaways, and chapters were generated by AI from the video's transcript and may contain errors. The video belongs to its creator, Matthew Baker.